Tag: HPQ

HP takes itself out of the market

Brenon Daly1 Comment

Contact: Brenon Daly

Over its two previous fiscal years, Hewlett-Packard has spent more than $20bn on a dozen acquisitions, with five of them costing the tech giant more than $1bn each. Those days are over, according to recently named CEO Meg Whitman. In her first conference call discussing quarterly financial results on Monday, Whitman told investors not to expect any ‘major M&A’ in the current fiscal year, which runs through the end of next October. That means HP will look to ink deals valued mostly at less than $500m, she added later in the call.

That conservative M&A plan comes as HP enters what Whitman described as a ‘reset and rebuilding year.’ Both revenue and earnings are projected to slide in the current fiscal year, but HP didn’t offer specifics on the decline. The company scrapped its revenue forecast altogether, while saying only that it expected to earn ‘at least’ $4 in non-GAAP earnings per share (EPS), compared to $4.88 in non-GAAP EPS in the just-completed fiscal year. With roughly two billion shares outstanding, that indicates HP will likely net at least $1bn less this year than last year. No wonder HP isn’t in the mood to go shopping these days.

What to do with webOS?

Brenon Daly

Contact: Brenon Daly, Chris Hazelton

Investors can only hope that Hewlett-Packard doesn’t announce any ‘bold, transformative steps’ this afternoon like it did the last time it discussed its quarterly financial results. Recall that it was just mid-August when the tech giant unveiled a dramatic overhaul of its business: looking to jettison its $40bn PC division while simultaneously closing the largest acquisition in the software industry in seven years. And, to make matters worse, HP announced those moves in the same breath as it said it would fall short of its earnings projections for the third straight quarter.

Given that the makeover had the dubious distinction of being both overdue and ill-conceived, it’s probably not surprising that it was doomed. (As, it turned out, was the chief architect of those plans, Leo Apotheker.) The company had shed as much as $20bn in market value at one point because of the strategic stumbles, although it is ‘only’ down about half that amount now.

Part of the recent recovery has come from the fact that HP has stabilized, at least in some regards. There was no lingering, interminable Yahoo-style search for a replacement when Apotheker got dumped; instead, the company moved Meg Whitman into the corner office in quick order. Also, rather than see through the sale of its PC business – a divestiture that would have only brought pennies on the dollar, if it could have been done at all – HP reversed course and said it plans to remain in the PC business.

Of course, there’s still uncertainty hanging over one key aspect of its Personal Systems Group: webOS. As we see it, HP has four basic options for the business, which supplies operating systems to tablets and smartphones. It could keep webOS and put real investments behind it, even though, in the short term, those efforts might not produce much return. HP could shop webOS to a device maker, which might benefit from an integrated hardware and software product or, at the least, cut the manufacturer’s reliance on Google’s Android. Alternatively, rather than try to sell webOS as an ongoing entity, HP could slim it down to simply a portfolio of patents and put that on the block. And finally, if it can’t sell webOS in any fashion, it could just follow in the footsteps of Nokia and its Symbian OS, and punt the software into the open source community in hopes of gaining developer support with a wider range of webOS devices.

Oracle’s unlikely acquisition

Brenon Daly

Contact: Brenon Daly

After spending last week with its customers and partners at its annual trade show, Oracle will be meeting later this week with its owners. The company’s annual shareholder meeting is slated for Wednesday. If the talk at OpenWorld is any indication, the question of M&A is almost certain to come up during tomorrow’s meeting of shareholders in the acquisitive company. Over the past decade, Oracle has purchased more than 80 companies at a total cost of more than $40bn.

Given some of the recent remarks, however, we’re fairly confident in scratching at least one name off of any potential shopping list: Hewlett-Packard. Some people have recently suggested that buying the reeling HP would get Oracle significantly closer to its goal of mirroring IBM’s strategy of providing not only single technology products, but also integrated systems as well as services to support the products. (The fact that Oracle hired ousted HP honcho Mark Hurd last year only added to the intrigue around the possible pairing.)

At Oracle’s meeting with financial analysts during OpenWorld, CFO Safra Catz fielded a question about the company’s appetite for a (hypothetical) transaction valued in the tens of billions of dollars. While not speaking specifically about HP, Catz made it nonetheless pretty clear that Oracle – and more to the point, her boss Larry Ellison – would be extremely unlikely to do a deal like that.

The reason? In all likelihood, Oracle would probably have to use at least some equity to cover the purchase of a company like HP, which currently has an enterprise value of $64bn. (And that’s without any premium on a stock price that is down 40% so far in 2011.) Noting that CEO Ellison owns some 1.1 billion shares of Oracle, Catz summed up the calculus this way: Would Ellison really want to trade some of his stake in Oracle, which she described as having its strongest-ever product portfolio, for a chunk of HP? That’s not a ‘compelling’ trade, she said dismissively.

The ever-rising costs of HP’s makeover

Brenon Daly

Contact: Brenon Daly

The bill for Hewlett-Packard’s makeover just keeps climbing. Even beyond the $10bn that has been erased from the market valuation of the company since announcing its unprecedented reorganization, the ailing giant is facing some real cost in the coming days.

For starters, it’s on the hook for $11.7bn to cover its pending purchase of information management vendor Autonomy Corp. That’s no small amount. In fact, it stands as the largest price paid for a software company in seven years. (And it’s one of the richest, valuing Autonomy at almost 12 times trailing sales, while HP itself currently trades at just 0.4x sales.) On top of that, there’s also the $1bn charge that’s looming for the shutdown and restructuring of the ill-fated webOS business.

But both of those costs are likely to be chump change compared to the losses that HP likely faces in getting rid of its Personal Systems Group (PSG) – assuming the company even finds a buyer for its desktop and laptop business. Recall that HP paid roughly $25bn in stock for Compaq, a consolidation move that made HP the largest single vendor of PCs. If it is able to sell that division now, we figure HP would be lucky to get about $5bn for it, or roughly one-fifth the amount it originally paid. (See our full report on HP and the rest of the PC industry.)

In calculating the potential purchase price for PSG – and this is strictly on a back-of-the-envelope basis – we looked back on what IBM got when it divested its PC business back in late 2004. Big Blue’s business was generating about $9bn in sales, and Lenovo paid just $1.75bn in cash and stock, plus the assumption of debt. HP’s PC business is slightly more than four times larger, so applying that loose multiple gets us into the neighborhood of $7bn.

However, a couple of factors will undoubtedly put some pressure on the multiple for HP. First, we would argue that IBM had a much more valuable brand with its ThinkPad line than the HP/Compaq brand. But far more important than those specific concerns around brands is the fact that the broader PC market has eroded significantly in the half-decade since Big Blue divested its business. To get a sense of just how far the PC market has fallen, consider the results from the most recent survey of consumers from our sister company, ChangeWave Research. Earlier this month, just 7% of respondents indicated that they expected to buy a laptop in the coming 90 days, with just 3.5% indicating that they planned to buy a desktop.

A longshot for Leo?

Brenon Daly

Contact: Brenon Daly

Hewlett-Packard is now, officially, Leo Apotheker’s company. Since his somewhat surprising appointment as HP’s chief executive last fall, Apotheker has been taking small steps while also dropping big hints that he would be recasting the tech giant. But few observers could have imagined the almost unprecedented scope of the transition that Apotheker laid out late Thursday: HP will be integrating the largest acquisition in the software industry in seven years while simultaneously looking into selling off its hardware business.

Wall Street appears to be skeptical that HP can pull that off, as shares in the company on Friday sank to their lowest level since mid-2006. (Incidentally, that’s just before Apotheker’s predecessor, Mark Hurd, took over the company.) On their own, either one of HP’s dramatic moves (working through the top-dollar acquisition of Autonomy Corp and possibly selling the world’s largest PC maker) would be enough to keep any company busy. Taken together, the combination appears doubly difficult. And that’s even more the case for HP, which, to be candid, has a spotty record on M&A.

Consider this: Autonomy will be slotted into HP’s software unit, which has been built primarily via M&A. But that division runs at a paltry 19% operating margin, less than half the rate of many large software companies, including Autonomy itself. And then there’s the $13.9bn HP spent in mid-2008 for EDS in an effort to become a services giant. So far this year, however, that business hasn’t put up any growth. And perhaps most damning is the fact that HP now doesn’t really know what it will do with its hardware business – a unit that largely comes from the multibillion-dollar purchases of Compaq Computer and Palm Inc.

A new frontier in IT management M&A

Brenon Daly

Contact: Brenon Daly

Few areas of software have seen more consolidation than the broad bucket known as IT service management (ITSM). Where vendors were once selling relatively simple helpdesk software, the offerings have evolved – primarily through M&A – into broader IT management platforms. The deals have ranged from massive strategic bets (Hewlett-Packard’s $4.5bn reach for Mercury Interactive, for instance) to tiny technology tuck-ins (e.g., EMC’s March 2008 addition of Infra Corp).

But what we hadn’t really seen in this flurry of dealmaking is an acquisition focused on mobile capabilities. Well, that was true until Thursday, when BMC Software reached for Aeroprise. (BMC is slotting Aeroprise into its Remedy portfolio, a business that BMC acquired in 2002 for $347.3m from bankrupt parent company Peregrine Systems.) The acquisition bolsters BMC’s ability to deliver its ITSM tools to smartphones and tablets of all flavors. And BMC knows the startup very well. It has been selling Aeroprise products (branded as a BMC offering) for the past year.

What happened to the storage sector’s Class of 2007?

Brenon Daly

Contact: Brenon Daly

Back in mid-2007, BlueArc was one of a quartet of storage vendors that put in their paperwork to go public during those go-go days on the stock market. However, if the NAS systems specialist, which recently re-filed its prospectus, does manage to see through its offering on this go-round, it will find itself very much alone. All three of BlueArc’s would-be fellow public storage contemporaries have been consumed by larger tech companies. The total bill for those three transactions: $4.8bn.

Dell would have had a hat trick for the Class of 2007 storage firms, if not for Hewlett-Packard. As it was, the Round Rock, Texas-based vendor took home EqualLogic in November 2007 before that company could even go public and then erased Compellent Technologies from the NYSE last December. Of course, Dell was lead bidder for 3PAR last summer, too, before losing out to HP. (And those deals are just for the big storage providers that filed their S1s in 2007. If we move back a year to 2006, another two vendors – Double-Take Software and Isilon Systems – that debuted that year were both gobbled up in 2010.)

With all this consolidation, where does that leave BlueArc? As we penciled out in our report on its planned IPO, the company is almost certain to be worth less when it does hit the market than it would have been worth before the Great Recession. Somewhat perversely, that’s true even though BlueArc will be twice the size that it was when it put in its prospectus in 2007.

If the company finds that prospect too demoralizing, it could always follow its fellow filers and opt for a trade sale. We would have put forward Oracle as a possible buyer of BlueArc, in a kind of ‘discount’ play for NetApp. But that seems even less likely since Oracle rolled in Pillar Data Systems on Wednesday morning. So, it looks like either HDS decides that it wants to own its OEM partner outright or BlueArc (finally) hits the market.

Maybe M&A for McAfee?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

With the ink barely dry on the M&A papers of SolarWinds’ purchase of TriGeo, we understand that another deal in the enterprise security information management (ESIM) market may be already in the works. Several industry sources have indicated that McAfee and NitroSecurity are thought to be close to an agreement that would give Intel’s subsidiary a solid ESIM offering.

McAfee has been looking in this market for some time. We gather that the company lobbed a bid (thought be in the neighborhood of $600m) for ESIM kingpin ArcSight before that company went public in February 2008. More recently, we weren’t surprised to hear that McAfee was in the process early for ArcSight last summer but got outbid by Hewlett-Packard, which ended up paying $1.65bn, or a steep 8 times trailing revenue for ArcSight.

If the acquisition indeed comes together, NitroSecurity would make a great deal of sense for McAfee. NitroSecurity, which we understand is running at about $40m in revenue, sells big-ticket installations to enterprises and the federal government – a market that McAfee clearly wants to be in. (NitroSecurity is also one of the few security vendors that has been able to crack into the industrial control system market, which gives the company a shot at lucrative contracts securing some of the nation’s critical infrastructure.)

The only other ESIM provider of size that might also give McAfee a comparable presence in the enterprise market would be Q1 Labs. However, that firm has a deep relationship with Juniper Networks, which is its single largest OEM partner. Nonetheless, Q1 has ascribed itself a fairly rich valuation, according to sources. The market may well soon have its vote on that, as Q1 recently indicated that it is looking toward an IPO.

What would Palm be worth today?

Brenon Daly

by Brenon Daly

We have to hand it to Palm Inc – the smartphone maker got out while the getting was (relatively) good. At least that’s one way to think about Palm’s decision to sell to Hewlett-Packard in April 2010 for $1.2bn. Hitting that bid looks even smarter in light of the beating that Research In Motion has taken since then, including Friday’s capitulation by many longtime shareholders. Consider this: since Palm became an HP business, RIM on its own has lost 80% of its market value. (Meanwhile, the Nasdaq is up slightly during that period.)

While some of RIM’s staggering decline can be traced back to the company’s own missteps around product delays, its fortunes also stand as a sort of proxy for the ‘non-hot’ (i.e., not Apple iOS- or Google Android-based) mobile market. And in that way, we shudder to think how Palm would have fared there if it remained a stand-alone smartphone vendor.

After all, Palm was barely holding on with a single-digit market share, not to mention the fact that it was teetering financially at the time of its sale. The unprofitable company was burning cash and, in the quarter the deal was going through, had just forecast that sales would fall off a cliff. In contrast, RIM is still profitable and growing. But you wouldn’t know that from the relative valuations of the firms. In its sale, Palm was able to fetch a not insignificantly higher valuation than RIM currently garners on the market.

Out with the old, in with the new

Brenon Daly

Contact:  Brenon Daly

Just over the past week, we’ve been struck by the fact that after in-house development efforts came up short, companies simply reached out of house for other companies that were doing the same thing – only better. In one case, it was to buy; in another case, it was just to partner.

Take Hewlett-Packard’s purchase earlier this week of Vertica Systems. (Subscribers can see our full report on the transaction, including our estimates of the undisclosed deal terms.) The purchase came just three weeks after HP said it was phasing out its Neoview platform, which never caught on in the otherwise fast-growing data-warehousing market. (We’re just guessing, but the move might have also been rooted in personal reasons, as well as financial reasons. Neoview was closely associated with HP’s former CEO Mark Hurd, who has been taking shots at his former shop ever since he joined Oracle.)

Although that acquisition doesn’t entirely line up with Nokia’s ‘strategic alliance’ with Microsoft, there are more than a few echoes. In both cases, a tech giant – armed with tens of millions of R&D dollars, not to mention dozens of engineers dedicated to the effort – was in danger of slipping into irrelevancy in an explosively growing market. The agreements represented dramatic about-faces for HP and Nokia. But that’s probably better than both trying to put a good face on what the market has said is a losing effort.